Former IMF chief economist backs 'people's QE'

LONDON (Reuters) - “People’s QE” could be an option to help economies fight future crises, Olivier Blanchard, who has just stepped down as chief economist of the International Monetary Fund, said on Wednesday.

Quantitative easing, where central banks buy assets such as government bonds from banks in exchange for newly created money, has been used in the euro zone, the United States and Britain to increase financial market liquidity and stimulate growth.

But the verdict is still out on whether central banks should be buying assets, as they do now, or instead tie up with governments to spend it on ‘real’ goods, known as “people’s QE”, as a way of stimulating the economy, Blanchard said during a lecture at the Cass Business School.

“There is clearly something else you can do if you get to zero (inflation) and still want to increase spending. You can buy goods.”

“Which one should you choose? We haven’t asked the question in the crisis but we should,” he said.

Blanchard said that this does not mean central banks would buy goods directly. Rather, governments can increase their fiscal deficits by spending on infrastructure projects. Central banks can then buy this debt with newly created money.

He also stressed that these fiscal deficits should be “a certain size and not more”.

People’s QE was a prominent part of the leadership election campaign for British Labour Party leader Jeremy Corbyn.

QE has come under popular criticism because banks, which were supposed to lend out the new money into the wider economy to stimulate growth, have not necessarily done so.

Blanchard argues that buying goods rather than assets can get the money out into the economy another way.

People’s QE has also been criticised because it may compromise central bank independence.

Bank of England chief economist Andy Haldane said in September people should be “very cautious” about encroaching on the separation between fiscal and monetary policy.

Reporting by Lisa Barrington and Marc Jones; Editing by James Dalgleish